The Japanese equity market rose in November, with the TOPIX (w/dividends) climbing 1.30% on-month and the Nikkei 225 (w/dividends) rising 1.98%. Equities rose in the early part of the month on strong US economic indicators and easing political uncertainty after the US midterm election results largely matched expectations.

The Japanese equity market rose in July, with the TOPIX (w/dividends) climbing 1.30% on-month and the Nikkei 225 (w/dividends) rising 1.12%. Stocks started the month lower amid anxiety over intensifying trade tensions between the US and China.

Global equity markets rallied throughout 2017 without any major setbacks. With volatility at extreme lows, it could be said that 2017 was an unusually fortunate year for market participants in terms of risk and reward.

Japanese profit margins continued roughly flat in the 1Q, but at a high plateau due to improved corporate governance over the past years. With global economic growth pushing up the top line, profits should continue to rise significantly in the quarters ahead.

The Japanese media are widely reporting that Governor Kuroda will be reappointed, which surprises very few people. Whether he wishes to finish his new five-year term is open to question, so the choice of Deputy Governor will likely be important.

The release of the second quarter data on aggregate Japanese corporate profits confirms my twelve-year theme about improving corporate governance in Japan and how investors should not worry about the slow domestic economy.

Our top Japanese Equity staff, including our CIO, report on how Corporate Governance remains on a strong upward trend, which should boost alpha for active managers and beta for the overall market via improvements in ROE and shareholder distributions.

In the Japanese equities market, high dividend strategies have significantly outperformed other strategies. We believe that – in a low growth, low interest rate environment where investors yearn for yield – these strategies will continue to outperform.

“Last night’s release of the first quarter data on aggregate Japanese corporate profits confirms my twelve-year theme about improving corporate governance there and how investors should not worry about the slow domestic economy.”

“Japan's example should always provide a guide to investors to be wary of arguments that surges in risk assets to high valuations based upon huge monetary and fiscal policy stimuli, coupled with excessive confidence, even if long-lasting, are acceptable.”

“Any major crisis in the Northeast Asian region, especially one involving a crisis within Japan’s borders, is likely to be handled very aggressively by the Bank of Japan (BOJ), with it bending the rule-book as much as the Fed did during the Global Financial Crisis or as the ECB has done in the past five years.”

Trump certainly is non-conventional, in many ways similar to Teddy Roosevelt. Hopefully, Japan can adapt to this new reality, and instead of blocking Trump's initiatives, be able to have acceptable compromise “deals” ready.

Given how important central bank policies are for the pricing of assets, our focus has to be on what they do next. If debt monetisation were to occur, it would have significant implications for equity investing.

The prevailing market view on the region remains negative, mainly centring on China's debt problem and general doubts about Abenomics. We focus on some aspects of this negativity from a sovereign balance sheet perspective and conclude that the potential dangers are overstated.

In light of the significant volatility ensuing from the results of the EU Referendum in the UK, we share our initial thoughts on the evolving situation as well as provide an update on the strategy you are invested or have an interest in and the implications of the event on the broader investment landscape in Japan.

Our global rates and currencies strategist in Australia lays out his dovish Fed scenario as an alternative to our house view. In it, he expects the Fed to wait until September or later to raise rates, and states his case that the Fed’s actions do not affect US bond yields.

We expect June and December Fed hikes, but only mild further easing ahead for the BOJ and ECB. Meanwhile, we expect oil prices to creep higher through 2016 despite the stronger USD due to relatively firm economic developments in China and the G-3.

We expect that global equity and bond investing will be positive for Yen based investors due to Yen weakness, but for USD based investors, we are taking only a neutral stance on global equities due to a cautious forecast for US equities, whereas we are positive on Asia-Pac ex Japan, Japan and Europe. Meanwhile, we are moderately negative on bonds in each region when measured in USD terms, so we underweight them.

There are many concerns about Abenomics losing its power to reform the economy, but our Chief Strategist in Japan, Naoki Kamiyama, shows that the major developments in tax reform prove that Abenomics is alive and well.

Looking forward, even though inventories were revised higher, their long depletion means they remain far too low in my view, and should continue start to rise significantly in the quarters and years ahead.

We expect that profit margins will expand further in coming quarters, driven by a large corporate tax cut and continued industry rationalizations that further prove that Japan's structural profitability trend continues upward.

Now that oil prices have declined, if a central bank targets its overall CPI at 2.0% for 2015, it would likely be labeled as being overly aggressive and perhaps attempting to unfairly weaken its currency.

In our view, the LDP coalition's maintenance of a strong two-thirds majority in this election will greatly help Prime Minister Abe and his party's reform efforts, while likely bolstering Yen weakness to some degree.

Moody's downgrade of Japan to A1 will likely have very little effect on bond yields, the economy or risk-asset psychology. The major reason why is due to its odd premise of predicting too much success of Abenomics, while most market observers are not so optimistic.

We have long reported on the role of the wealth effect, as its importance is vastly underestimated by local and foreign investors. The 2Q data for net financial assets shows a QoQ increase to a new historical high.

Update on Japan’s “Show me the Money” corporate governance — the dividend paid by TOPIX continues to rise towards its historic high, but the payout ratio has been stagnant for the past few months, as earnings continue to rally equally well.